A moderation in lending growth in the Vietnamese banking system last year is credit positive for banks’ asset quality and capitalization, especially in light of their rapid credit growth in recent years, because borrower quality is likely to improve, Moody’s Investors Service has said in a report last week.

The SBV's headquarters in Hanoi. Photo: Minh Tuan

The State Bank of Vietnam (SBV), the country’s central bank, last week released data showing that Vietnam banks’ total credit, including both loans and bonds, grew 14% in 2018, which is the lowest growth rate since 2014, largely because of the SBV’s tightening of credit growth in the system,

Tighter credit can lead to rising problem loan ratios, reflecting the seasoning of banks’ loan portfolios. However, lower credit growth encourages banks to focus on borrowers of better quality, which will improve asset quality in the long term, Moody’s Investors Service analysts said.

Vietnamese banks have generally overemphasized loan growth. Without tighter controls from the SBV, most banks are likely to have grown loans at more than 20% in 2018. The moderation in credit growth will also reduce pressure on capital, especially for state-owned banks.

Source: Moody's Investors Service

“We attribute the slower credit growth to SBV’s tightening of credit growth limits given to banks since the third quarter of 2018, as well as the muted loan growth at capital-strapped, large state-owned banks,” said the analysts.

The SBV typically assigns a credit growth limit to every bank in Vietnam at the beginning of each year. Then, throughout the year, the SBV monitors the systemwide level of credit growth. In some cases, based on economic growth and inflation targets, it grants additional credit growth limits to banks.

The analysts expect credit growth in 2019 to remain at around 14% as the SBV maintains its control over credit growth in the system, and as the progress of raising new capital by state-owned banks remains slow.

In particular, the SBV is linking credit growth limit to Basel II implementation, granting higher credit growth limits only to banks that transition onto Basel II ahead of the 2020 timeline. So far, only Vietcombank and VIB have been officially recognized by the SBV as having implemented Basel II.

They warned that Vietnam banks' rapid credit growth in recent years and the high overall leverage in the economy, 131% of GDP in 2017, represent a risk to banks because borrowers’ debt servicing capability could be negatively impacted if there is a slump in economic activities or if interest rates increases, or both.